HOA Insurance Rates Video Transcript:
Hi everybody and thank you all the Board Members out there that have taken your valuable time to be here for this ECHO educational webinar today you’re going to get a lot of good update information about HOA Insurance rates.
About three years ago when David came up with a great idea to ‘ask the insurance expert‘ I was the first speaker and I asked him how long do I have to talk Dave? 20 minutes? He goes ‘no, how about an hour Kevin,’ and I remember I freaked out. I’m like oh my gosh, do I really know enough about insurance to talk about it for an hour. Somehow, we got through with it though and it was great. So, I’m really happy today to be able to share the virtual platform with other professional very competent Insurance professionals that specialize at homeowner associations.
One caveat before I begin, I’m dealing with a little bit of a respiratory illness so I might be coughing a little bit during my talk, so I apologize upfront for that. I think we have a lot to cover today so next slide please.
HOA Insurance Rates – Pain all Round
We’ve all felt the pain this year right. A lot of us, especially if you’re in the high Wildfire Zone if you got non-renewed so I just wanted to share that we know what kind of pain you have, and we also are suffering from it on the insurance side as well.
Next slide, so what happens around the globe impacts local HOA insurance rates in Northern and Southern California Central Valley and that is because catastrophes have been the primary reason that the insurance rates have gone up. As we’ll see in a little bit there are other primary causes as well, but the number one cause overall is natural catastrophes and there’s something called reinsurance companies that provide capital to The Standard Market. So, if you’re a Farmers, a State Farm, a Travelers, a Philadelphia insurance company your HOA insurance rates depend on getting capital from around the world. Well, if there is a catastrophe in the Philippines, or in in Britain, that means that the capital available to the US market is limited.
This outer space picture is to illustrate that we have to look outside the box and outside California to really understand what’s happening. Next slide, so what I call a perfect storm over the years last 20 years. I’ve been in insurance for 25 years; I’ve never seen such dramatic increases in our HOA insurance rates. Unfortunately, it’s not only homeowner associations as many of us know it’s our single-family homes, our auto insurance and even commercial property insurance across different Industries.
So why is it Happening?
The catastrophes I mentioned are the primary cause. They’ve been enormous all over the globe and especially in the United States. Secondly when you have a lot of catastrophes, tornadoes, hurricanes, floods, hailstorms, severe snowstorms, convective storms, you’re going to see a construction inflation rise which it has. That means the insurance companies have to spend even more money when a catastrophe hits. We all know about the California Wildfires, how long it took to repair those homes, and how much that expense was, but very few of us actually think about the high cost of vehicle repairs. We know it but that actually impacts how much you’re paying as homeowner associations because many of the same insurance companies that ensure your homeowner association actually write auto insurance.
So, for example, I remember 10 years ago if you had a dent in your fender, it would cost maybe $500 to repair, today it’s more like $1,500. Another reason I read something last week when I was doing some research for my talk today that the average American car sold today has over 400 microchips in it each one! Over $1,500 in repair cost, that’s amazing, and they say if it’s a hybrid or if it’s electric car you’re looking at about 700 microchips. So, the high cost of vehicle repair is another factor in driving insurance rates up and then there’s what the insurance companies call social inflation. How often have you seen personal injury attorneys fishing for customers on TV on radio in print on billboards? Sure, some of these claims are legitimate, and you need a good attorney to defend you no doubt, but a lot of them are being frivolous and that’s also raising all the insurance rates (including HOA insurance rates) for all of us.
Implications
About a decade ago the average personal injury law according to the American property and Cas Association the average payout was about $26,000. Today the average payout is over $120,000. That’s huge and then older buildings across the California and across the United States, especially in our Bay Area you have a lot of galvanized pipes, and a lot of electrical panels that are beginning to fail, and that also causes more claims, which means the insurance companies are paying out more.
Then there’s a high cost of reinsurance, as I mentioned a minute ago, the reinsurance companies, one in particular called Munich RE is the largest reinsurance company in the world. If an insurance company like Farmers or Travelers were to take $100 of Premium from their customer, they’ll give about $20 to Munich RE. In exchange for that Munich RE will step in and pay part of the claim when it happens. Well in January 2023 Munich RE renegotiated their terms. They said they still want about $20 on every $100 you collect, but we’re only going to pay about $15 if there was a claim, and the primary insurance companies had nowhere to go. They had to take those terms because they’ve been paying out so much money and they’ve been losing money in the last couple of years. So I call it the ‘perfect storm,’ these all come together, one or two of these events and catastrophes happened a few times and we’re in such a pickle today!
Next slide, I love this graph because it really drives home the point of how many how many claims we’ve had in the last 10 years. What you’re looking at here on this graph is how many separate claims, separate catastrophes there were over $1 billion and if you go back and look at the average at the very bottom of the graph it was only about 7 to 8 billion dollar a year. That was the average. Then in 2011, it jumped up to about $19 or $18 billion. In 2021, it jumped up to about $20 billion. In 2020 23 billion. Well take a look at the very top of graph, 2023. All of a sudden last year we had a horrendous year, and as you’ll see in a minute 2022 wasn’t much better.
Some examples:
Next slide, so to give you an example about a year and a half ago we had hurricane Ian it touched down about 3 o’clock in the morning with high tides in Florida, it was a category five hurricane, 150 MPH winds, 162 fatalities. This particular hurricane was the third largest in US history, behind only Hurricane Sandy and Hurricane Katrina, and it happened at the end of 2022. Guess who has to write the check to repair all this damage for $74 billion? The insurance companies do.
Next slide, so if hurricane wasn’t too bad, two months later a smaller hurricane, only $1.6 billion, happened. It also happened to touch down about 3:00 in the morning and caused a tremendous amount of devastation for which the insurance companies had to write the check.
Next slide, so obviously construction inflation has gone up we talked about that already
Next slid, I have to keep it moving for speed. It’s a great time to be a carpenter, or a plumber, or heat and air condition installer because these guys are making good money.
Insurance Companies Behaving Badly…
Next slide, insurance companies have been behaving badly, they’re non-renewing a lot of associations, if you’re in a high Wildfire Zone or if you’ve had multiple claims they want more money today, a hard Market means that their appetite has shrunk, they’re not willing to go after as many businesses as they used to. Many associations today see an increase in the price.
Next slide, so what a lot of companies are doing today is they’re taking some very painful actions, they’re laying off their workforce, they’re cutting our agents’ commissions. I can tell you I’ve been eating a lot more peanut butter sandwiches than I’d like to these days. And the insurance companies are actually going to Jamaica and the Philippines for call centers, because it’s a lot less expensive for them to set up a call center there. Some of them are competent, some of them are not, but these are some of the painful steps that the insurance companies have to take to be profitable and in the long term. It’s going to benefit all of us as soon as rates, one day we hope, stabilize.
Next slide, I want to share a couple of real stories with you that happened just to me and my associations. One in the last week, and another one in the last year. I had a large Association that I managed the insurance for in the East Bay. They were so large that it was 260 million dollars in estimated replacement cost. Farmers decided they couldn’t afford this type of HOA insurance rate risk. A quarter billion dollars and I don’t blame them. On one hand this Association was relatively claim-free had to go to the E&S (the Excess and Surplus lines market) and guess what the prices that you’ll see out there are mercenary. Their premium with Farmers went from about $129,000 a year to about $41,000 a year, and that did not include the D&O, or the Fidelity of the workers compensation, or the umbrella. Overall, I found out later, the total cost was about $520,000 a year for their insurance when previously it was only $129,000. So, this is what’s happening to a lot of big associations, the insurance companies have no appetite for that.
In fact, this might be a good time for me to share, I have a good friend of mine who shared some information with me and if I have it here in front of me, looks like Farmers Insurance, which had a suspension on writing associations, we’ll be writing HOA insurance rates again from August 1st, but we’re going to have some restrictions. They’re only going to insure your Association if it’s less than 30 years of age or $25 million. Luckily, I represent a lot of different companies today so we can go outside. I don’t like it, putting it bluntly like that, but that’s what’s happening. Travelers Insurance, the same thing, no more than $25 million in replacement cost or no more than 30 years of age. Mercury Insurance, the Philadelphia insurance company, also have some hard rules in their underwriting. Argan Mutual is another company and Nationwide seem to jump in and jump out of the California Market. I’m not sure what they’re up to today but that was one real story I wanted to share with you.
Another one that just happened recently is Farmers have one of my associations here in the North Bay up for renewal and the underwriters looked at the website of the management firm, saw that one of the Board of Directors who was being smart, prudent and diligent recommended that anybody who has a Zinsco panel replace it. Well that was enough for Farmers to issue a non-renewal to that Association because they had Zinsco panels out there. Obviously this board was smart and proactive in the last 80 Days, they installed 101 new panels and replaced the old dangerous Zinsco panels, so now Farmers insurance is going to renew them. Thank heaven! But it’s a dramatic step that they had taken very quickly as well so these are some of the things that are happening.
Another example is another HOA, here in the North Bay, had an old Heritage tree fall down over the weekend. It was the biggest tree I’ve ever seen in my life fall down. The cost for the Emergency Response Team just to cut the tree down and pull it away from the homes because it damaged two homes was $45,000. Oh my gosh, that is a lot of money.
Next slide, so the dreaded Zinsco panel. I won’t go into too much detail here but in the 1960s and 70s this was the most popular electrical panel. It was popular because the Zinberg brothers who owed the company developed a new breaker called the R38 twin circuit breaker. It was made of aluminum because the Vietnam War was eating up all the copper. It was a great breaker at the time because it handled two circuits instead of one which freed up a lot more room on the electrical panel. However, it wasn’t until 20 or 30 years later that a lot of fires started to occur – there was a design flaw in this panel. The aluminum was cheap grade so what happened when you had a power surge it didn’t trip the breaker and the power continued to go and go until it caused the fire. Some people when they saw electrical disturbance put their hand on it and they got shocked. So that’s why the Zinsco panels, if you have any in your association, get rid of them. We might even hear some more about this from some of our other agents in the industry today, but I wanted to mention that to you.
Next slide, by the way, GT Sylvania bought out the Zinsco brothers around 1970 -1980. I forget the exact year but they rebranded their panel is called it the Challenger, but it had the same R38 twin circuit breaker so be careful about that should you have an electrician come out and take a look at your panel.
What’s next for HOA Insurance Rates?
Next slide, we’ve got one or two minutes left, so I wanted to give everybody my crystal ball for next year. Who knows what’s going to happen in our world today, but I’m hoping, and I think rates will stabilize next year. Why? Because the insurance companies have taken dramatic steps to increase their rates which is more revenue for them, they’ve laid off some of their staff, they’re starting to leverage technology a little better, and according to Swiss RE (which is again one of the largest reinsurance companies in the world) they’re expecting a 98.5% property combined ratio which is really good. Anything under 100 means the insurance companies are making some money.
Next slide, I think some of our other agents are going to address that issue. I’ve got to make a quick plug for the ‘walls out’ property policy as many of you know I’ve been recommending this for two years. You’ll save.
Next slide, ‘walls out’ means that the insurance company will pay for everything up to the sheetrock including the sheetrock, but the homeowner has to pay for their kitchens, bathrooms, flooring, other fixtures on the inside. It’s a great way to save 20% a year on your insurance. About 70% of the claims that I see are water claims inside a unit, toilet overflow and so on and dishwasher. If you transfer the risk to the homeowner that means you just mitigated 70% of your claims in the future. Another benefit of it. And then I also think it’s fair if a homeowner has a toilet overflow in their unit let their ho6 policy pay for that. This way you protect your rates.
So, to finish up, in the next five years I know rates aren’t going to go down or backward. We all know that they’re only going to go up. So, take these proactive steps and then you can at least mitigate future insurance rates.
Thanks everybody I appreciate you’re being here today and thank you so much.